Economics Flashcards
(23 cards)
how do you determine whether a value is elastic/inelastic?
PED/YED/XED/PES > (is greater than) 1 = elastic
PED/YED/XED/PES < (is less than) 1 = inelastic
PED is always negative, ignore the symbol for this
what is the formula for PED?
how does short run and long run of a product’s life relate to PED?
short run = price inelastic (it is a unique product on the market)
long run = price elastic (more substitutes become available on the market over time)
how do businesses use PED to increase revenue?
price inelastic = should increase price to increase revenue
price elastic = should decrease price to increase revenue
what is the formula for YED?
what does a positive YED value mean?
it is a normal good - examples include cars, new clothes, and eating out at restaurants
what is an elastic normal good?
a luxury - a good with a YED > 1
what is an inelastic normal good?
a necessity - a good where YED is between 0 and 1 (e.g. toothbrush, bread)
what does a negative YED value mean?
it is an inferior good, where higher income leads to a fall in demand - examples include bus travel and ‘value’ products in supermarkets
inferior goods are of lower quality than normal goods, and are usually upgraded from when income increases
what is XED?
cross elasticity of demand - how quantity demanded of one product changes in response to a change in the price of another product
what is the formula for XED?
what does a positive XED value mean?
goods A and B are substitutes - the higher XED is, the closer substitutes they are
A and B refers to the formula
what does a negative XED mean?
goods A and B are complements - examples of close and weak complements respectively are: cars + petrol, pencils + sharpeners
A and B refers to the formula
what is PES?
price elasticity of supply - how quantity supplied responds to a change in price
what is the formula for PES?
what factors cause inelastic supply?
any from:
* long production lag
* scarce stock availability
* limited spare capacity
* hard-to-substitute FOP
* short-run
what factors cause elastic supply?
any from:
* short production lag
* high stock availability
* large spare capacity
* easy-to-substitute FOP
* long run
what is the multiplier effect?
any change in the components of AD will lead to an even greater change in national output (real GDP)
how is the multiplier effect explained?
an increase in consumption (C), for whatever reason, creates income for other people in the economy. this income is then spent, increasing C again, which in turn creates income for more people. this leads to a looping increase in AD, and when it ends is dependent on the economy’s MPC (marginal propensity to consume).
what is the formula for the multiplier effect?
OR 1/MPW (marginal propensity to withdraw)
what determines the size of the multiplier?
a larger MPC leads to a larger multiplier. MPC is determined by:
* marginal propensity to save (MPS)
* marginal propensity to tax (MPT)
* marginal propensity to import (MPM)
MPS, MPT, AND MPM make up MPW
what is the accelerator effect?
changes in investment (I) can be directly linked to changes in the rate of GDP growth
how is the accelerator effect explained?
when GDP is growing at a steady rate, firms have higher confidence in the economy, which will lead to higher investment (I). this increases AD which further increases GDP.
the opposite can also happen - a decelerator effect
